By John “Jack” F. Kiley, CPA, CISP
Managing Partner / MidAtlantic IRA, LLC
Setting up an Account:
The first step is to establish a Self-Directed Retirement Account (IRA). This account may be a Traditional, Roth, SEP, SIMPLE or any other type of self-directed account, which are all offered by MidAtlantic IRA. You can obtain the proper application kit by going to our website or contacting us directly. Please be aware that not all of the forms included in the account opening kit are necessary to establish whichever specific account type you choose to open. Before sending us the completed application, we suggest that you contact one of our account-opening specialists to review the completed forms and to ensure that all required items are fulfilled. This will streamline opening your account and, in turn, not hinder any pending investment.
Making an Offer:
Once your account is established, you are ready to begin your search for real estate and to eventually make an offer. In writing a contract, you need to make the offer in the name of the IRA (MidAtlantic IRA, LLC FBO [your name as it appears on the application], [type] IRA). One common question is, “Can I make the offer in my name and then assign the contract to my IRA?” The answer to this question is no. Your IRA is a separate legal entity from you. Assignments between unrelated legal entities are perceived to be “for value” and are taxable. Because transactions between you and your IRA are prohibited, this is not allowed. Many clients will make offers in the name of their IRAs “and/or” themselves. This allows the client to respond to counteroffers and to more efficiently negotiate the contract.
Completing the Buy Direction Form:
Once you have a ratified contract, you will need to complete MidAtantic IRA’s Buy Direction form. This form serves several functions. First, it notifies us of your intent to purchase a specific asset using your Self-Directed IRA, and it authorizes us to affect that purchase. Additionally, it gives us the “particulars” regarding your pending purchase. In the case of real estate, it identifies the property, purchase price, down payments (if necessary) and who you have selected for settlement among other things. When we receive the completed Buy Direction form and the ratified contract, we will contact the settlement company and inform them that you are purchasing the property with your Self-Directed IRA and that we will need to receive the proper documents at least two days prior to closing.
Sending us the Buy Direction form and contract as soon as possible helps both you and us in several ways. By being in contact with the settlement company at the beginning of the process, any administrative issues can be resolved. Most administrative issue arises because not all settlement companies are familiar with Self-Directed IRAs. We are also able to better schedule and accommodate changes easily if we are aware of your intent to make an investment. Our goal is to ensure that your purchase goes as smoothly as possible.
Moving Toward Closing:
From the time you have a ratified contract to the time of settlement, you may have several items to take care of. You have the ability to engage any party to inspect, research, advise you or anything else you feel necessary in this process, as long as those entities/individuals are not considered to be “disqualified persons.” For a more detailed discussion regarding disqualified persons, please see our FAQs page.
Understanding the Closing Process:
When we receive final documents from the settlement company, we will send them to you electronically to read and approve. Although it is very likely you have already seen these documents, we require that you sign off on the documents we are funding from. We will not fund until we receive these back from you.
Recording Property Ownership:
Upon funding escrow, the title will pass and be recorded in the name of your IRA. The recorded deed will be sent to our office for safe keeping. You may verify your purchase by requesting a copy of the recorded deed or simply look in the land records.
Generating Income from the Property:
Any rents, royalties or other funds derived from the investment in the property must be deposited back into your IRA account. You may negotiate leases or hire a property manager to do this if you prefer. We do not find tenets or manage your property. Leases must be in the name of the IRA and should be signed by us. Checks received for deposit must be written to your IRA – not to you. If we receive a check for deposit made out to you personally, we will not be able to deposit it into your account because, as previously stated, you are a separate entity from your IRA. If you receive income directly based on your investment in the property, the IRS will deem this to be a distribution to you, resulting in taxable income, and may construe the receipt of income to mean you intended to take possession of the property, making the value (not cost) of the property at that time also distributed to you (again resulting in taxable income).
Paying Expenses of the Property:
All expenses associated with the property must be paid from your IRA account. Bills should be submitted to MidAtlantic IRA for payment along with a payment authorization form. Payment authorizations direct us to pay the accompanying bill and specify how much to pay, since there may be times when you do not want to pay an entire bill. The bill should be sent to your IRA, not you, and reference the property address. If you pay expenses of the property directly, the IRS will presume that you intended to take possession of the property, which would result in taxable income based on the value of the property at that time.
Selling the Property:
Similar to when you purchased the property, the sales contract should be in the name of the IRA. Again, we should be notified of your intent to sell as soon as possible by issuing us a Sell Direction form. This form will include the contract for sale and authorize us to engage in the selling process. When we receive the final documents from the settlement company, we will electronically send them to you for your approval. We will not sign any documents until you have read and approved them. After we sign the documents, the settlement company will wire your funds to your account, which will then be available for future investment.
As with any investment, it is important that you speak with your legal and/or financial advisors to help you decide if the transaction in question is beneficial to you. MidAtlantic IRA does not offer feedback or advice regarding purchases with you IRA account, but merely facilitates the process as a third party custodian of you account.